Sunday, December 30, 2012

Some Fiscal Cliff Myths

The media is baiting us on Fiscal Cliff horror stories, to get us to watch television and to get us to click on stories.  The political parties are also using this man-made crises to try to get us all riled up.  Don't be.  Things are not as bad as all that.

In a day or two, we will launch off the "Fiscal Cliff" which sounds scary, but is not as bad as people are making it out to be.

As I noted in an earlier posting, the only real effect of this "Fiscal Cliff" is to go back to the tax rates of the Clinton Administration (when the country was doing very well, thank you) and to cut government spending across-the-board, which is what we should be doing, anyway.

Cutting, that is, except Social Security and some other entitlement programs, which ironically are what the politicians are arguing should be cut, so we can preserve defense spending.   Frankly, for the average citizen, the cliff is a better option.  Bear in mind that we spend more on defense than the next ten largest countries - and you get an idea that we can afford a few cuts without being "weak on defense".

So a lot of people are just saying "ho hum" to the Fiscal Cliff and this has the media apoplectic.  After all, if we aren't going to pay attention to the media, the world will come to an end!  Oh, wait, they told us that was December 21st.  Right?

So the media continues to crank up the Fear - to get you to watch.  And a lot of "end times scenarios" are batted about in the media, and fortunately, most all of them are outright falsehoods.  The media doesn't bother to explain things well, as you get more hits and more viewers with vague explanations and letting people live under misunderstandings.

Besides, television isn't really a media well suited to long explanations of anything.  As they say in litigation (or in politics), the first side to go technical, loses.  And when you try to explain things clearly, people change the channel.

So what are the myths the media is spreading, either directly or by error-of-omission?   Here are a few:

1.  If nothing is done by December 31st, we go over the fiscal cliff and this can never be undone, ever, ever, EVER!    This is not said outright by the media, but it is implied in every story, and it is the greatest lie never told - as it is an error by omission.

Every media story foretelling gloom and doom is predicated on "If we go off the fiscal cliff" such-and-such could happen - provided that Congress does absolutely nothing for a whole year.

But of course, this is just silliness.  While Congress might not agree on a plan by tomorrow, they likely will come to grips with the issue in the coming weeks.   It is highly unlikely that Congress will sit on its hands for all of 2013 and do absolutely nothing.

So while the "cliff" provisions might kick in for a week or so, it is likely that Congress will act, and a new budget agreed upon, and many of the tax provisions and the like will be made retroactive to January 1st.

2.  If no agreement is reached by December 31st, we will automatically go into a recession.   Again, what the media actually reports (and words so carefully that you might miss it) is that some economists predict that we could have a recession if Congress refuses to act for an entire year.   Again, this is a far-fetched possibility.

The reality is, the "fiscal cliff" provisions will only kick in for weeks, at most, and this hardly will cause recession.  But that doesn't make a story you will sit through five SUV commercials to watch, does it?

Even assuming this absurd scenario occurs, where Congress does absolutely nothing for a year, the tax provisions, as I noted, are the same ones we had during the highest period of post-war growth in this country.  And as for reduced government spending, isn't that what the teabaggers wanted all along?  Cutting the Pentagon budget by 10% will hardly cripple our military.  Cutting anything by 10% will hardly cripple it.  In fact, I suspect you would see some creative cost-cutting measures enacted, if various government departments had to really tighten their belts.

3.  Milk will cost $8 a gallon after December 31st!   This is another alarmist prediction, based on the assumption that dairy price subsidies will jump next year - to 1949 levels.   The price of any commodity is based on the demand and supply in the market.   In the USA, we are awash in a sea of milk and orange cheese, simply because we have subsidized the production of these two products for so long.

The market determines prices, not the government.  If milk goes to $8 a gallon, a lot of people will stop buying it, and demand will go down, which in turn will drive prices down.  The net result will be that milk will reach an equilibrium in the marketplace.

If the government is forced to buy milk at inflated prices, this just means the government will end up with a lot of milk on its hands - which may flood the market when the government then tries to unload it.

Efforts to control milk prices really only affect farmers, not consumers.  In California last year, a lot of dairy producers went bankrupt as the State tried to control milk prices and as a result, the cost of producing milk was higher than the state-mandated price.   Farmers lost money and went bankrupt.   The farmers will suffer from dramatic shifts in price supports, but consumers will simply choose to consume other products.

And unfortunately, they already have.  Milk consumption is down in the USA - supplanted by cheap soft drinks.   Already many Americans are guzzling down cheap soda pop in place of milk.   The end of subsidies would likely just accelerate this trend.

And as for cheese, I am not sure that prices would go up that much.  Imported cheeses are not that much more expensive that American-made cheeses, so again, this acts as a price-check in the marketplace (unless some milk producers start pushing for higher tariffs).  And frankly, the same could happen to milk - we would end up, as the largest milk producing country, importing milk on a large scale.

So, sorry, I have to call bullshit on this one.   The price of milk will be determined by consumer demand, not the presence or absence of subsidies.   And frankly, we need to eliminate all of these farm subsidies, anyway, as they act as a distorting factor in our so-called "free market."  Gub-Ment Chee and Food Stamps have fans in farm country, but they result in a lot of bad food being made.

But of course, all this talk is speculation, as it is unlikely  we will go off the "fiscal cliff" for more than a few weeks at most.  These price support programs will be re-enacted, unfortunately, and at most, the Dairy farmers may gain wild milk prices - to the government for a week or two.   But even this scenario looks to be a little far-fetched.  The USDA would have to issue a notice saying it was going to pay the increased price for dairy products, then set up a schedule for when purchases would start, a process that could take a few weeks.  And likely, by then Congress will have made a deal and make the reinstatement retroactive to January 1.

$8 a gallon milk?  Ain't Happening.   People will make other choices.

UPDATE:  It appears a compromise has been reached on dairy price supports.  Now Congress acts like it did us all a big favor and "saved the day" when in fact the "peril" we faced was one of their own making.  Sheesh!

4.  People won't know what their tax bills will be!  The IRS will be in a panic!  People won't be able to file early!  Other scary scenarios with exclamation points!  Relax, Cletus.  It ain't all that bad.

First of all, your 2012 tax rates will be unaffected.  So there is no "uncertainty" as to how to calculate your taxes for FY 2012.  Tax rates for 2013 will be affected, but you don't have to worry about that return until April 15, 2014.

And for most people, their taxes - if they go up at all - will go up no more than 3%.  The upper marginal rates will go up by that amount, but that applies only to income over a certain level, and as such, it may mean less than a 3% increase in your taxes.

Three percent - you think you can handle that?  If you can't your finances are in a mess.   For poorer people, it is likely they won't pay much more taxes, as most of them don't pay any taxes anyway - their deductions exceed their pitiful incomes as it is.

Yes, Captial gains rates may go up, and some very rich people may have to pay a lot more in Capital gains.  Boo-Hoo.   But for retired middle-class people cashing in their 401(k) plans, their tax rates will still be at ordinary income rates.

And as I noted before, you can convert ordinary income into Capital Gains and vice-versa.  Mitt Romney pays himself in deferred Capital Gains to get a 15% rate.  You can bet if it was cheaper, he would become a salaried employee of Bain Capital and convert those Capital Gains right back again.

Companies might pay more dividends, if Capital Gains rates go up.  This might be a good thing, as lets face it, Wall Street has been playing the Capital Gains game for so long that Dividends are looked upon as "old school".

But of course, all this talk is speculation, as it is unlikely  we will go off the "fiscal cliff" for more than a few weeks at most.   Tax rates will likely be "fixed" based on some compromise, and likely this will be made retroactive.

5. Your paycheck will drop as your employer will have to withhold more taxes:   This one is also specious, with alarmed teabaggers (the ones who wanted a fiscal cliff in the first place) saying things like, "I don't know what my taxes will be!  I won't know whether I can buy a new car or not!"

Your income taxes might go up by 3% if that.  And Obama's "payroll tax vacation" will end, and we will start funding Social Security at the full 9% rate.   Your paycheck will hardly be cut in half or anything stupid.

Payroll companies have already said they will continue to withhold at the 2012 levels for now.   Employers can "make up" any additional withholding later in the year, if need be.  But as the Compromise will likely extend tax cuts for the middle class (retroactively to January 1) you won't have to make up anything at all.

So again, no fire here.

* * *

The list goes on and on.  Politicans and the Media are both like a child with a toy trumpet.  They make noise and want to be heard, and the more you ignore them, the louder they play.  "Pay attention to me!" they scream.  "What I have to say is important!"

And sadly, we have fallen for this, in recent years - thinking that what the media says is relevant to our daily lives and what politicians do actually controls the economy.

And both parties play this latter game.  Republicans like to say that government doesn't create jobs.  But Mitt Romney ran on the platform that he was a "jobs creator" - which was a far cry from Ronald Reagan's platform of "get the government out of the jobs business completely!"

Some sort of muddled compromise will be worked out in Washington - it always works that way.  The world won't end, and even if Congress decides not to act (which is far-fetched) I am not sure that the result would be all that bad, for most Americans.  Our taxes would go up slightly, and government spending would drop by 10%.   We would eliminate deficits and people would be forced to go back to work, rather than collect 99 weeks of unemployment.

It is sad, in a way, that the Fiscal Cliff provisions won't kick in for very long.  Because they really are a strong dose of medicine that this country really needs.